This is an extract from an earlier article at Systematic Income Premium.
In this post we provide a quick update of the Carlyle Credit Income Fund (CCIF), a newly launched fund that cannibalized another closed-end fund, or CEF, as we discussed earlier. Specifically, we discuss the completed tender offer as well as news about the fund’s holdings – an important factor in gauging its ultimate distribution rate and likely performance.
Tender Offer Completion
As we discussed in our CEF Weekly in early August, CCIF was holding a tender offer of about 30% of its shares at the NAV. At the time, the fund was trading around a 5% discount to its previously announced NAV of $8.21 at the end of July.
The record date for having to purchase the fund and the election period were well past the tender off announcement, which gave investors plenty of time to buy the fund and immediately tender it back. Unless the NAV fell more than 5% from its previous level, the tender offered a quick alpha opportunity.
Our view was that there were two small tailwinds to the NAV which should support it through the tender period. One was its cash position as well as its higher-yielding CLO (collateralized loan obligation) holdings – both of which should accrue additional carry to add to the NAV. Market remained well-behaved up to and through the tender period, which suggested that CLO marks should hold up well.
This is pretty much how things played out. The NAV came in at $8.30, or 0.7% above the previous figure. Moreover, the accepted rate was over 40% – well over the 30% tender offer, meaning some investors didn’t tender shares, allowing those who did to sell more into the tender, increasing the payoff.
This is an important point – to participate in the tender offer, it’s important to not just buy the stock, but also to make sure to action the sale of the stock back to the issuer. This can be done by going through the corporate actions list on the investor’s account.
Finally, and another good result for investors, is that after rising north of $8 during the tender offer, the price of the fund has fallen off slightly back to the pre-tender level of around $7.85, or a discount of 5.5%.
In other words, investors could have bought the stock around $7.80 – 7.90, sell 40% of the position back to the fund at $8.30 (about 5.7% from the midpoint), clip the $0.0551 dividend on the 18th (for a total return of around 6.4%) and add the returned cash back at the original price. A 6.4% roundtrip (on tendered shares, less on the overall holding) for 2-3 weeks of work is a great result for those who participated.
Over the last few weeks, the fund has released more tidbits about its activity.
First, we have the names and profiles of the fund’s managers. Interestingly, the lead manager is Lauren Basmadjian who previously worked at Octagon Credit Investors – a CLO shop – and co-managed the XAI Octagon Floating Rate & Alternative Income Term Trust (XFLT).
XFLT has a much smaller footprint in CLO Equity than funds like Oxford Lane (OXLC) and Eagle Point Credit (ECC) (currently it has a 29% CLO Equity allocation with the rest in CLO Debt at 16% and loans at 44%). Although XFLT has underperformed OXLC and ECC over the last 5 years in total NAV terms by about 1% per annum (5% vs 6% CAGR) in our view that is actually a much better risk-adjusted return.
We also now know that the fund deployed 77% of the initial cash proceeds from the VCIF portfolio sale into CLO Equity. This is important because it tells us that CCIF will very likely be closer to OXLC and ECC in its allocation than to XFLT or Eagle Point Income (EIC).
We also know with good certainty that its distribution rate is going to increase significantly from the current 8% on NAV. This is because the yield of CLO Equity securities is well above that figure, even without taking into account potential boost from leverage. CCIF said that the weighted-average yield of its CLO Equity portfolio is 18.7%.
At the moment, we know with some certainty that we are likely to see two medium-term developments for CCIF. One will be a likely boost in its distribution, once all of its cash is put to work. Not only is the fund’s 8% distribution rate on NAV low for a credit CEF, it is miles off the NAV distribution rates of CLO Equity CEFs, all of which are north of 20%.
And two, its valuation will very likely increase. This is for two reasons – other CLO Equity CEFs like OXLC and ECC are trading at around double-digit premiums, plus a likely distribution hike should be followed by a higher valuation as it normally does in the CEF space. At the moment CCIF does not have a lot of name recognition, however, this should change over time as investors get more comfortable with the fund.
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